Thursday, November 16, 2006
Pennsylvania’s Big State Casino Giveaway
Magna Entertainment sold the Meadows Racetrack for $200 million to a Las Vegas based company, Cannery Casino Resorts. What makes this deal stand out is not the nearly $150 million profit Magna earned over five years, but how the state gave away money by selling casino licenses for a flat fee of $50 million instead of auctioning them off to the highest bidder.
The 277 percent profit earned by Magna, who bought the track in 2001 for $53 million, does not reflect any major improvements made to the facility itself, or by any resurrection in the harness racing industry, but by the fact that the racetrack was guaranteed to get a slots license. The value of the license was set by the state for a flat fee. However, as we have argued before, the value is much greater and should have been captured by the state through an auction process.
Admittedly, each casino license would have been valued differently depending upon location of the parlor, but by offering each license for $50 million the state will only realize $700 million from the sale of 14 licenses. How much more could the state have gained from auctioning them off? The two casinos in the Pittsburgh area, the Meadows and the stand-alone facility in the city, offer some evidence. Cannery Casinos paid more than $147 million above the original sales price for the rights to the slots license. They still have to pay for the license as well as build the casino. It is worth noting that the original agreement was for $225 million, but had been negotiated down. Thus the value of the slots license is in excess of $200 million. The state will only collect 25 percent of that.
The stand alone parlor in Pittsburgh is obviously worth more. In the opening salvo, the Isle of Carpi offered a $300 million arena to the City whereas on of its opponents, Harrah’s countered with a development proposal worth approximately $500 million. These proposals do not include the value of the license itself. Clearly, each entity has set the value of the license well above the $50 million asking price—from the packages being offered, we see that the range is from $350 million to $550 million. Depending on which operator is chosen, the state will collect anywhere from 14 to 9 percent of this value.
As more tracks and casinos get sold, we will learn of the true value of the slots license and the magnitude of the state’s big giveaway. But if this trend holds, with the state only capturing on average 20 percent of the true value of these licenses, the state will have lost out on billions of dollars.
The 277 percent profit earned by Magna, who bought the track in 2001 for $53 million, does not reflect any major improvements made to the facility itself, or by any resurrection in the harness racing industry, but by the fact that the racetrack was guaranteed to get a slots license. The value of the license was set by the state for a flat fee. However, as we have argued before, the value is much greater and should have been captured by the state through an auction process.
Admittedly, each casino license would have been valued differently depending upon location of the parlor, but by offering each license for $50 million the state will only realize $700 million from the sale of 14 licenses. How much more could the state have gained from auctioning them off? The two casinos in the Pittsburgh area, the Meadows and the stand-alone facility in the city, offer some evidence. Cannery Casinos paid more than $147 million above the original sales price for the rights to the slots license. They still have to pay for the license as well as build the casino. It is worth noting that the original agreement was for $225 million, but had been negotiated down. Thus the value of the slots license is in excess of $200 million. The state will only collect 25 percent of that.
The stand alone parlor in Pittsburgh is obviously worth more. In the opening salvo, the Isle of Carpi offered a $300 million arena to the City whereas on of its opponents, Harrah’s countered with a development proposal worth approximately $500 million. These proposals do not include the value of the license itself. Clearly, each entity has set the value of the license well above the $50 million asking price—from the packages being offered, we see that the range is from $350 million to $550 million. Depending on which operator is chosen, the state will collect anywhere from 14 to 9 percent of this value.
As more tracks and casinos get sold, we will learn of the true value of the slots license and the magnitude of the state’s big giveaway. But if this trend holds, with the state only capturing on average 20 percent of the true value of these licenses, the state will have lost out on billions of dollars.
